LIHTC 2014 Outlook: Industry Optimistic After Decent 2013 and Positive Developments
By Glenn Petherick
8 min read
“We had a good solid 2013 and we’re looking forward to a good 2014,” says Ryan Sfreddo of New York-based syndicator Red Stone Equity Partners, LLC. He said the firm raised a total $325 million in low-income housing tax credit (LIHTC) equity from investors last year and is targeting about $450 million this year.
Indeed, many industry participants are optimistic for the LIHTC equity market and program in 2014, based on comments in survey responses and in recent interviews and by speakers on a January 15 panel at a Washington, D.C. conference sponsored by the National Council of State Housing Agencies.
Respectable Equity Raise in 2013
Most syndicators experienced a solid but not spectacular 2013. In interviews and survey responses, only 5 of 14 syndicators said their total amount LIHTC equity raised from investors was greater in 2013 than in 2012. The rest did about the same or less volume.
Reporting record annual equity volume in 2013 were RBC Capital Markets’ Tax Credit Equity Group ($721.34 million); Ohio Capital Corporation for Housing ($331 million), and R4 Capital ($200 million). (See p. 24 for Ernst & Young’s Corporate Tax Credit Fund Watch chart
with information on 2013 volume and current multi-investor funds.)
“The most we ever raised before was about $260, $270 million,” said Hal Keller, president of Ohio Capital Corporation for Housing. “So to go to $331 million was a big jump for us.”
Several syndicators raised the same or less equity in 2013 partly blamed deal slippage toward year-end, but said they have current robust pipelines that position them well for 2014. “We have a very solid pipeline of secured deals,” said National Equity Fund’s Joe Hagan.
Of syndicators providing a dollar equity target for this year, about four of the syndicators anticipated raising significantly more equity in 2014 than in 2013.
Syndicators are generally optimistic about 2014, citing two positive events in late 2013 that could boost the equity market this year:
- The December ratification by the Financial Accounting Standards Board (FASB) of an accounting rule change allowing qualifying public companies to switch to a more favorable “proportional amortization” method of accounting for their LIHTC investments. (For details, see Tax Credit Advisor, January 2014, p. 8.); and,
- The issuance by federal banking regulators of new interpretative guidance for the Community Reinvestment Act (CRA) that appears to enable banks to receive positive CRA consideration for making equity investments in LIHTC projects outside of their assessment areas. (For details, see Tax Credit Advisor, January 2014, p. 14.)
Raymond James Tax Credit Funds, Inc. has received “overwhelmingly positive” feedback from its LIHTC investors about the positive impact that the accounting rule change will have on their operating earnings, said Steve Kropf.
“We’ve talked to several people who have said that [LIHTC] is an investment that they are absolutely going to re-introduce to their executive committees to become an approved asset class,” says Ben Mottola of Stratford Capital Group. “No one has said, ‘Oh now that it’s happened we’re in.’ But it’s definitely opened people’s eyes, no question.”
“Ultimately I think it is going to bring in more investors,” said San Francisco accountant Michael Novogradac, managing partner of Novogradac & Company LLP. “But I don’t think it’s going to happen very quickly.”
Industry officials said it takes a long time to educate prospective new investors about the tax credit and LIHTC investments and for them to get the necessary approvals and budget to begin investing.
Craig Mellendick of Enterprise Community Investment, Inc. said a number of current investors will have to work through some complicated issues to determine whether they qualify to switch to the new accounting method. He indicated new investors would likely qualify if they start investing through multi-investor funds.
“Investors are currently in a holding pattern waiting for the guidelines to come out and conducting internal analysis,” Sarah Laubinger of Boston Financial Investment Management said on January 12, a few days before FASB released the new accounting update (see sidebar at right).
David Leopold said Bank of America Merrill Lynch believes it would qualify to switch from the equity method to the new method for its non-guaranteed LIHTC investments, and lauded the accounting rule revision, but said the bank hadn’t yet decided whether to make the change.
Stephen Daley of The Richman Group and Marc Schnitzer of R4 Capital cautioned that the accounting rule change alone isn’t likely to draw in new investors if they don’t feel prevailing LIHTC investment yields are high enough.
Industry officials were divided about whether they felt the new CRA guidance will lead many banks to begin making LIHTC investments outside of their assessment areas. To the extent this happens, several sources said this could improve credit pricing for LIHTC projects outside hot CRA markets.
Leopold described the language in the new CRA guidance as a little ambiguous and expected Bank of America to continue focusing on making LIHTC investments only in its nearly 300 core assessment areas. He said the bank made a little over $1 billion in LIHTC investments in 2013, about 25% greater than its 2012 volume.
Current Yields, Credit Pricing
Projected after-tax yields to investors on new national multi-investor LIHTC funds have dropped a bit from last fall. In the current version of Corporate Tax Credit Fund Watch (see p. 24), projected yields on eight of nine current national funds range from 7.0% to 7.35% – the sole outlier is at 7.85%. In the October 2013 version, projected yields on 12 national funds ranged from 7.25% to 7.85%, with all but one between 7.25% and 7.50%.
Laubinger felt that projected yields on new national multi-investor funds trading between January and April will likely be in the range of 7% to 7.25%.
Meridian’s Jack Casey, who believes the new accounting change will attract new investors to LIHTC later in 2014, suggested that the increased competition resulting from this could cause projected yields on new national multi-investor funds to drop by about 50 basis points in the fourth quarter.
Syndicators reported that they are seeing healthy investor demand for their current LIHTC funds.
“We’re seeing a significant level of demand from both CRA and economic buyers,” says Jeff Goldstein of Boston Capital.
“Investor demand is strong,” said Craig Wagner of RBC Capital Markets’ Tax Credit Equity Group. “Our challenge is winning good deals at pricing that balances the yield to investors and profitability to syndicators.”
NEF’s Joe Hagan felt credit pricing to developers is generally 85 cents to $1.11 per credit dollar.
As for current credit pricing, Red Stone’s Ryan Sfreddo said, “Every deal is different, but anywhere from 85 cents to $1.15 (per dollar of tax credit) is what we’re seeing,” counting both non-CRA and CRA markets.
“In the Great Lakes region, LIHTC pricing tends to be in the 88 to 96 cent range in strong CRA markets and in the 83 to 88 cent range in non-CRA markets,” said Marge Novak of Great Lakes Capital Fund.
Continuing Innovation
In addition to national multi-investor funds, this year is certain to see the continuation of numerous regional multi-investor funds, as well as innovative “tiered” funds with multiple investment classes with differing yields, to appeal to both CRA and non-CRA investors.
City Real Estate Advisors, for instance, is on the street with a roughly $32 million Hawaii fund with three properties offering investors their choice of federal and/or higher-yielding state housing tax credits in whichever amount of each they wish, said Tony Bertoldi. An investor taking an equal share of both credits would get a projected yield of about 7.50%, he said.
Along the same lines, Kari Downes and Amy Dickerson said Enterprise Community Investment plans to roll out a new multi-investor fund this spring similar to an innovative fund it closed last August. That fund (EHP 24) had four tiers with different yields, from which investors could pick and choose to not only get the overall yield level they wanted but also to satisfy their specific geographic CRA needs. Says Dickerson, “It had Pacific Northwest projects at 6.5%, Chicago properties at 6%, California properties at 5.75%, and national fund-priced properties at 7.5%, all within one fund.”
Looking ahead, industry officials expect challenges this year from having to underwrite new projects at the floating credit rate (7.60% in January) rather than the “fixed” 9% rate. Without an extension by Congress, and depending on what individual state housing credit agencies do, new projects may either need to be awarded a larger amount of credits than before or obtain more gap funds to be viable, or state agencies may have to make more liberal use of the 30% basis boost.
Industry officials suggested that the LIHTC market and program should be helped out this year by HUD’s Rental Assistance Demonstration (RAD) program and the unlikelihood of tax reform.
“Tax reform is not going to happen in this Congress. It’s highly unlikely to happen in the next Congress,” said Washington, D.C. attorney Richard Goldstein, a partner at Nixon Peabody LLP and counsel to the Affordable Housing Tax Credit Coalition.
Said Meridian’s Jack Casey: “I think 2014 is going to be a very good year – we’re optimistic.”
